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How many paid bidders to recruit

Question

You are selling gold at auction and will receive the second-highest bid. Each bidder's bid is independently uniform between $500\text{\char36}500 and $1000\text{\char36}1000, and the auction house charges $10\text{\char36}10 for every bidder it recruits. If you recruit the number of bidders that maximises your expected net proceeds, what is that expected net amount?

Short answer

$810\text{\char36}810 (with 99 bidders). The second-highest of nn uniform order statistics on [500,1000][500,1000] sits on average at fraction n−1n+1\tfrac{n-1}{n+1} of the range, i.e. 1000−1000n+11000-\tfrac{1000}{n+1} dollars. Subtracting the 10n10n fee, the net is maximised at n=9n=9: 900−90=810900-90=810 (versus about 808.9808.9 at n=8n=8 and 809.1809.1 at n=10n=10).

Adapted from QuantQuestions.io; question and answer rewritten by SelfMadeQuant.com.

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